Operating Income or EBIT is linked to Return on Capital for both regular definition and Joel Greenblatts definition. W R Grace & Co's annualizedreturn on capital for the quarter that ended in Mar. 2015 was 13.06%. W R Grace & Co's annualizedreturn on capital (Joel Greenblatts) for the quarter that ended in Mar. 2015 was 39.95%.

Definition

Operating income, is the profit a company earned through operations. All expenses, including cash expenses such as cost of goods sold (COGS), research & development, wages, and non-cash expenses, such as depreciation, depletion and amortization, have been deducted from the sales.

W R Grace & Co's Operating Income for the fiscal year that ended in Dec. 2014 is calculated as

* All numbers are in millions except for per share data and ratio. All numbers are in their own currency.

Be Aware

Compared with a companys EBITDA margin, Operating Margin can be manipulated by adjusting the rate of depreciation, depletion and amortization (DDA).

If a company is facing competition, its Operating Margin may decline. Often the Operating Margin declines well before the companys revenue or even profit decline. Therefore, Operating Margin is a very important indicator of whether the company is facing problems.

For instance, by 2012, Nokia (NOK)s problems were well known and its stock had lost more than 90% of its market value since 2007. But Nokias Operating Margin had already been in decline since 2002, although its earnings per share were still rising. Investors who paid attention to Operating Margin would have avoided this huge loss. The same can be said for Research-in-Motion (RIMM).

Therefore, Operating Margin is a very important screening filter for GuruFocus. GuruFocuss Buffett-Munger screener requires that the profit margin is either consistent or expanding. The Model Portfolio of the Buffett-Munger screener has outperformed the market every year since inception in 2009.

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